Greetings! Spring training is ON!
First the Tweets:
- It’s Churchill Time! Will tomorrow’s STB Reciprocal Switching (AKA “Forced Access”) hearings reflect the beginning of the end of the Railroad Renaissance or the end of the beginning? The AAR’s (CEO Ian) Jefferies stands almost as alone as Winston did in 1940 - actually the ASLRRA, CSX, UNP, CP, CNI, NSC, and NSC all will speak) until allies and cooler heads prevailed – then. Expect, by rail regulatory standards, great theater – sound and fury signifying nothing concrete this week, just talk….Please note: Action, if any, would be years away. The idea of adding complexity to the supply chain at this point in time – as well as considering “competition” without considering highways, waterways (not to mention product & geographic competition) is….questionable? Indefensible?
- The hearing schedule is attached….and here is the YouTube link: (339) Surface Transportation Board - YouTube. I note that only in Panel 6 (OK, “VI” – this isn’t the Super Bowl) do actual shippers – as opposed to trade associations – speak….
- By the way, the government may try to take away, but they also sometimes give – see the 60 Minutes piece on DOT Secretary Buttigieg and the Infrastructure Plan: Watch 60 Minutes Season 54 Episode 26: 3/13/2022: Voting Rights and Wrongs, Secretary Pete, Ted Lasso - Full show on CBS
- Pershing Square’s Bill Ackman’s purchase of CP shares is – on the face of it and by all reports - supportive, not invasive (after CHRW joined the list of activist battlegrounds) – perhaps the best news for CP after everyone and her sister came out seeking a pound of flesh in the CPKC merger – see last week’s report (attached). The Ackman announcement did make many sit up and take notice, however, to which I reply – activist against Keith Creel??
- Not a tweet but a Mea Culpa – I may have been too quick to dismiss the NA rail commodity opportunities coming from this awful war – possibly in corn, though I stick to my bearish view on increased NA wheat exports after the poor crop in the US and disastrous one (-~30%) in Canada. This looks much like 1914, unfortunately – in Europe. The Baltic Dry Index is up 50% - since January. Further thoughts:
- The US isn’t stepping up wheat plantings – as one trader said on US Farm Report “wheat is struggling to hang on to its acreage” (and the USDA recently reduced its 2022 wheat export estimates) while corn and beans fight for leadership in the traditional 90/90 (million acres) split; I sense with Chinese demand and (bad) Brazilian drought, Beans have the momentum
- There is very little US/Ukraine+Russia customer country overlap – the US exports of wheat to Egypt run only in the $50mm range
- Of course, the follow-on effects, depending on the duration, could be massive – on fertilizers for example, which could help the US and especially Canadian potash
- JPM reduced its global GDP forecast by almost a point due to the war
- Russia and Ukraine combine to supply 15% of global seafarers (merchant seamen), though they combine for less than 1% of the TEUs
- Next month is NEARS – Jason and I did a promo video: Tony and Jason Teaser 2022.mp4 on Vimeo
Railroad Equipment Finance’s annual conference returned live after the pandemic gap, was well-attended (~300) - and provides a unique, bottoms-up look at the rail world, from which I would say two or so broad themes emerged:
- The railcar ecosphere is feeling pretty happy, with production heading back above-replacement levels, with cars-in-storage down to ~a fifth from a third (those left mostly some combination of coal/sand and very old), with scrap prices high, with rails promising growth but still congested (good for car owners, at least at first), with Mexican production relatively immune to US labor issues (TRN) and a slight hedge against materials inflation (but rising steel prices fuels scrap and steel movements, too)
- Few had much good to say about rail-roads, however, or more specifically the “PSR effect”. One comment was the recent espousal by Class Ones of the positive impact of single-line service (see CPKC and CSX-PAR filings and comments) is, in effect, a real condemnation of rails interline capability despite the billions of CAPEX and all of the IT improvement. Adriene Baily of Oliver Wyman repeated and updated her RailTrends presentation on the need for rails swerve the new supply chain, and embrace customer-centricity. She noted that while the truck share of flexible freight was growing vs. rails, on the other hand since the carload peak in 2006 rails had freed up 120mm train miles of capacity! CBR investor Gil Lamphere and pioneer Mike Cory added to the debate while noting that, unusually, service remained poor while volumes were down – the labor effect everyone seems to dismiss. Harold Hill of FTR saw no recovery in rail market share and saw opportunity in only 3 areas: grain (OK, not in ’22), coal (OK, only in ’22), and CBR (really?) – note all derived-demand businesses rather than service-related ones.
- Rail Pulse wasn’t given its own platform but was supported and discussed by 3/5 charter members (TRN, GATX & Watco; 3/6 of the new total) and by one customer and one class one executive (but not – yet?) speaking on behalf of his company. RP was lauded for visibility for the ability to create “one source of truth” (as another founder, GWR, said at SEARS last week).
Some other nuggets from the desert:
- Railinc noted that over the past 10 years covered hoppers are 21% bigger, and tank cars a whopping 56% - but bridge maintenance has gone up annually by 20%
- CBR has gone from 42% of the flammable tanker fleet to 13% since the 2014 peak
- UP pointed out something I had never considered but should have – the increase in car size (see below, and the 263-286 factor) has put a damper on reported car loads….
- Coal was represented by the NCTA, with all its chips in, so….nonetheless, they see an export met coal (Canadians, CSX& NSC) bull market lasting to 2025. Steam coal was called “less certain”, despite near-term opportunities supply is dwindling (the long-term outlook for the commodity was described, rather dryly, as a disincentive for CAPEX). 2028 will be a huge year for power plant retirement. The last new coal car purchase occurred in 2015….
- Watco spoke on their new business model – the terminals describing their by now well-known Dow deal (and perhaps there are 30 or more similar models out there?) and their small switching deal partnering with CN (the DUSR in Louisiana, the “Other LA”) where on a mile of track they have grown the business from ~35K annual CLs to 60K+ by increasing switching days to 7+….there just might be a lesson in that.
- Boxcars, the old mainstay,. The simplest car – such a complex market! As GATX pointed out, rails own only 16% of the total, however, TTX owns another 10% (and a higher lease rate for reasons that still confound me). Shippers own 17% directly and leasing companies (like GATX) own 57% - and growing. The fleet has shrunk faster than the market, and there are some signs of demand recovery, and share recovery potential (packaging, food, etc). 13K orders – enough? 40% of the fleet is ancient….But, on the other hand, Pulp & Paper share has dropped from 15% to 9% - since 2019! As the shipper on the boxcar panel, Packaging Corp noted, rails need to show commitment to service….
- PLG gave an excellent overview of the Petrochemicals/Plastics market, with lots of puts and takes:
- They share my concern about the political environment in Mexico (AMLO’s support for Pemex) though they note that Mexico cannot fuel itself without imports
- They noted that the “2nd Wave Buildout” of Gulf coast chemical capacity was nearing completion (and the 3rd wave is on hold) – but their earlier bullish projections have mostly come to pass (plastics carloads up 31% since 2012)
- Renewable Diesel is for real, and coming soon; its non-hazardous transportation (as is, BTW, DRU/CBR) and rails can participate in the midwestern-to-coastal feedstock (corn oil, used cooking oil, soybean oil, animal fats) or the finished (reversed) product supply chains. Renewable diesel is now ~144K cars a year – could triple by 2025….
- EV trucking has, in PLG’s opinion, a long, er, road (PLG sees internal combustion engine share still at 80% - in 2050!
ALSO:
- If you missed the Progressive Railroading ESG Webinar, here is the link to Janet Drysdale’s (CN) presentation: Session 1 - CN - Janet:hhttps://youtu.be/xfSRHApbgB4 and Gina Trombley’s (Wabtec) - Session 2 - Wabtec - Gina: https://youtu.be/nr_ze_0D58kas well as Session 3 - CSX - Corey: https://youtu.be/Q0fnAoCG7eA
- The (US) trade gap widened again, by 9.4%, in January (pre-war) month/month
- Ships off LALB down into the 40s from their January high of 109
- Analysts stink! Or so say FedEx contractors about that carrier’s own shipping forecasts, which encouraged a big ramp-up in contractor supply unmatched by missing demand (WSJ)….
- Yellow settled its DOD overcharging case, begun in 2018, for $6.8mm
Anthony B. Hatch
abh consulting
http://www.abhatchconsulting.com
abh18@mindspring.com
Twitter @ABHatch18